Does tougher import competition foster product quality upgrading ?

Ana Fernandes () and Caroline Paunov

No 4894, Policy Research Working Paper Series from The World Bank

Abstract: Over the past two decades, globalization, and more specifically the increased exposure to competition from low-price producers in China and India, has created a new economic environment for other emerging economies. The most advantageous way for manufacturing firms in those economies to position themselves in domestic and international markets is to offer upgraded and differentiated rather than"mundane"labor-intensive products. This paper investigates whether increased competitive pressure from imports forces firms to improve the quality of their products. The econometric analysis relies on a rich dataset of Chilean manufacturing plants and their products. Product quality is measured with unit values (average prices) and industry-level transport costs are used as an exogenous measure of import competition. The authors find a positive and robust effect of import competition on product quality. This effect is found to be particularly strong for non-exporting plants. The results also show that increased import competition from less advanced economies is the major cause for the positive impact on quality upgrading. The overall evidence points to the benefits of trade openness for product innovation but demonstrates at the same time that competitive pressure alone will not enable local plants to catch up with leading world producers.

Keywords: Transport Economics Policy&Planning; Markets and Market Access; Economic Theory&Research; Water and Industry; Access to Markets (search for similar items in EconPapers)
Date: 2009-04-01
New Economics Papers: this item is included in nep-com, nep-cwa, nep-int and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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